Buyers & Purchasers of Payments
People or businesses that buy structured settlement and annuity payments are the core of the secondary market. This spinoff industry is regulated by federal laws and court proceedings that protect annuity owners who want to sell payments.
Buyers are primarily businesses, like Annuity.org, that pay a negotiated sum for the structured settlement or annuity. The seller receives cash that can be used immediately for any purpose.
The secondary market started about 25 years ago and has grown dramatically in that time, while also maturing as a business. The market is highly regulated to protect the sellers and the courts must approve all agreements.
Periodic Payment Settlement Act
The secondary market for structured settlements is an offspring of the Periodic Payment Settlement Act (PPSA) passed by Congress in 1982. The PPSA was an incentive for insurance companies to offer an option to people who received large settlements from lawsuits. The option was to stretch settlement payouts over many years, as opposed to receiving a lump-sum payment that may not be wisely spent.
The new law was received well by all parties involved. There were tax incentives in the PPSA that were advantageous to both the insurance companies issuing the structured settlement and the person receiving it. The government also expected to benefit from the law because many of the people involved could not return to work after an accident, and needed a steady source of income to replace lost wages.
Stretching their payments out for years was expected to keep them from squandering a lump-sum payment and ending up on a government welfare program.
There was, however, a downside to the 1982 legislation: It did not take into account people’s changing financial needs. In fact, it restricted their choices. Once a person agreed to receive periodic payments, the company issuing the structured settlement could not change the contract and make it a one-time, lump-sum payment.
That made it difficult for people to cope with situations like an emergency medical condition, opportunity to purchase a house or need for college education money.
A New Market Is Born
By the late 1980s and early 1990s, small, specialty finance companies came in and provided a lump-sum payment option in exchange for the payout rights to structured settlements.
There were no rules or regulations governing the companies buying annuity payments at that time, and some took advantage of it. Some structured settlement owners took considerably less money than their products were worth, and others paid excessive fees to do so.
States were quick to see the problem, and began passing laws and regulations to protect the original owners of the structured settlements. Illinois passed legislation in 1997 to prevent that from happening. Over the next few years, 46 joined in and set up rules for companies buying structured settlements.
Some of the requirements include disclosing to the seller all expenses and fees associated with the sale, the total value of the structured settlement, the net amount the seller would receive and any penalties that might apply.
Owner’s Best Interests Protected
Perhaps the most important line of the legislation was that the agreement to sell a structured settlement must be approved by the courts. By July 2002, Congress enacted legislation that largely eliminated tax issues associated with the purchase and sale of structured settlements. The legislation said that if the sale was not approved in advance by the courts, then a 40 percent tax would be levied.
The 2002 law also requires judges to make sure the sale of the structured settlement is “in the best interest of the payee, taking into account the welfare and support of the payee’s defendants.”
Selling Your Structured Settlement
That requirement has significantly reduced reservations owners might harbor about selling their structured settlement. The business is highly regulated and closely monitored to protect the seller’s best interest.
The primary market for structured settlements is estimated to be about $6 billion a year. The secondary market buys its products from the primary market. There are about a dozen companies prominently involved in the secondary market, buying annuity payments. It makes sense to shop around and compare rates.
Remember that companies buying structured settlements are businesses trying to make money. They charge fees for their service, similar to the way banks charge fees for loans or credit card accounts. The fees for structured settlements pay for legal, administrative, recording, filing and miscellaneous work. These fees are usually factored into the settlement.
Once you have chosen a company, they should send you a contract and disclosure statement. You should review the contract and disclosure statement, either with your attorney or a financial advisor. When you sign it and return it to the company buying the annuity payments, they must file it with the appropriate court to get a judge’s approval.
The court then convenes a hearing and may ask you to attend the hearing to answer questions about why you want to sell the structured settlement. If the court agrees to the payout, the judge will approve the transfer and you will receive a lump-sum payment.
- Haithcock, S. (2013, October 29) Secondary market annuities boast higher yields. MarketWatch.com. Retrieved from: http://articles.marketwatch.com/story/secondary-annuity-market-boasts-higher-yields-2013-10-29?link=MW_home_latest_news
- Campbell, J. (ND) I want to Sell My Structured Settlement – What Is the Process. Ezinearticles.com. Retrieved from http://ezinearticles.com/?I-Want-to-Sell-My-Structured-Settlement---What-Is-the-Process?&id=6258055
- Hindert, P. (2012, August 7) “Only Half the Story” Retrieved from http://s2kmblog.typepad.com/rethinking_structured_set/model_structured_settlement_protection_act